KPMG cleared after watchdog's HBOS probe

The big four accountancy firm KPMG is poised to be cleared over its handling of the accounts of HBOS, the mortgage lender which was brought to the brink of collapse during the 2008 financial crisis.

Sky News has learnt that the Financial Reporting Council (FRC) is expected to announce as soon as Tuesday that it does not believe there are grounds for further action after reviewing the audit of HBOS’s accounts for 2007.

The development, which follows a probe lasting 15 months, will come as a relief to KPMG, which is embroiled in a crisis in South Africa over its relationship with the controversial Gupta family.

The FRC’s probe was launched only after fierce pressure from Andrew Tyrie, the former chairman of the Treasury Select Committee, who described it as “long overdue” when it got under way in June 2016.

HBOS fell into the arms of Lloyds TSB in the autumn of 2008 after incurring huge loan-losses and finding itself barely able to finance itself in the wholesale money markets.

The resulting entity, Lloyds Banking Group, had to be rescued with more than £20bn of taxpayers’ money, which the Government only fully recouped earlier this year.

The FRC is chaired by Sir Win Bischoff, who chaired Lloyds for several years after the taxpayer bailout.

Banking regulators are continuing to investigate the actions of individual directors of HBOS, although there is little clarity about when that work will be concluded.

In a statement in June 2016, KPMG said it wanted the FRC inquiry to be “completed as quickly as possible”.

“It has now been eight years since the financial crisis,” it said.

“The FRC, PRA and FCA have already looked at the events that led to the failure of HBOS in exhaustive detail and we have cooperated fully with all inquiries and investigations.

“Throughout it has been our position that our audits of HBOS were performed to the appropriate prevailing standards.

“We are confident that our work will stand up to objective scrutiny.”

The accountancy firm said the catalyst for HBOS’s ultimate failure was the altered market conditions resulting from the collapse of Lehman Brothers in September 2008.

“HBOS reported pre-tax profits of £5.5bn in its 2007 financial statements and continued to raise capital in the wholesale markets well into 2008,” KPMG said in June last year.

“Banking analysts continued until August 2008 to expect that it would be profitable in that year.”

The FRC investigation examined two core issues: whether HBOS’s management was right to use a going concern assumption in the bank’s 2007 accounts; and “whether there were material uncertainties about the entity’s ability to continue as a going concern that needed to be disclosed in the financial statements”.

In its response to the official inquiry into HBOS’s failure, undertaken by banking regulators and published in November 2015, the FRC said it had conducted a review focused on audit work relating to HBOS’s loan-loss provisions, which massively understated the toxicity of the assets on the bank’s balance sheet.

“The review primarily focused on whether there are reasonable grounds to suspect that there may have been misconduct in the application of the relevant accounting and auditing standards at the time,” the watchdog said.

“Based on the findings from this review of the relevant audit work the conduct committee of the FRC has concluded that there were not reasonable grounds to suspect that there may have been misconduct as defined under the disciplinary scheme for members of the accounting profession.”

Its statement sparked a furious response from Mr Tyrie, who said that it was “essential – in the interests of public confidence – that the FRC get on with this investigation, and without delay”.

In their report, the Financial Conduct Authority and Prudential Regulation Authority painted a vivid picture of HBOS’s uncontrolled expansion as the bank’s balance sheet grew from £477bn in 2004 to £690bn in 2008.

That growth continued even after widening concerns about the state of financial markets and access to wholesale funding led to the run on Northern Rock in 2007.

Peter Cummings, who ran the bank’s ill-fated corporate lending division, is the only former HBOS executive to have been punished to date.